Putin Sochi Bill Seen Rising $7 Billion After Flame Dies

Fireworks light the sky over the Fisht Olympic Stadium as the Olympic flame is lit at the end of the Opening Ceremony of the 2014 Sochi Winter Olympics in Sochi. Photographer: Peter Parks/AFP via Getty Images

Feb. 13 (Bloomberg) -- The record cost of President
Vladimir Putin’s Winter Olympics will keep climbing long after
the athletes have gone home and the flame goes out in Sochi.

Russia, which is already spending 1.53 trillion rubles ($44
billion) to host its first Winter Games, may have to spend as
much as $7 billion more in the next three years just to maintain
the venues and other new infrastructure around Sochi, two
government officials involved in the planning said. That’s about
what Canada spent on the 2010 Vancouver Olympics.

Nobody knows what the final tally will be because the
government hasn’t decided exactly what to do with the venues
yet, the officials said, asking not to be identified because
budget talks are confidential. What’s clear is that in the rush
to get Sochi ready, the post-Olympic plans weren’t thought
through. As a result, annual spending will be tens of times
higher than estimated, straining budget, they said.

“Post-game use options must be factored into the Olympic
organizers’ planning very early on,” said Costas Mitropoulos, a
former head of the Greek fund that oversees venue sales from the
Athens Games. “The issue is not the maintenance cost but the
waste of capital resources,” Mitropoulos, now an executive
director at PwC in Athens, said by e-mail.

Sochi Love

Greece, which spent a then-record 8.5 billion euros ($11.6
billion) to host the 2004 Summer Olympics, is still struggling
to develop Hellenikon, the former airport where several venues
were built. Twice the size of New York’s Central Park, the site
is now Europe’s largest unused tract of urban real estate and a
symbol of a country trying to recover from a six-year recession.

Putin, who personally oversaw Sochi’s transformation from a
sleepy Soviet backwater on the Black Sea into a glimmering
tourist and sporting attraction, told some of the area’s 400,000
residents this week that they shouldn’t rely on federal funding
for further development.

“Additional investment can’t really be expected after the
enormous resources invested here,” Putin said at a meeting with
Sochi residents on Feb. 10. “For all the love for Sochi, it now
must be developed through very different means.”

Two-Year Curiosity

Drawing Russian tourists away from traditional resorts in
Turkey and Egypt may be almost as hard a task as attracting
foreign visitors, Irina Tyurina, spokeswoman for the Russian
Tourist Industry Union, said by phone today. Without them, the
infrastructure won’t make a profit, she said.

“People will come to Sochi for the first two years out of
curiosity, then the flow will dry up,” she said. “The state
isn’t systematically promoting Sochi as a resort, and that’s no
less of a large-scale task than preparing for the games.”

Even so, the government will continue to pay to maintain
the new infrastructure and refit some of the venues through at
least 2016 in an effort to avoid the problems experienced by
Athens and other host cities, the two officials said. Estimates
range from 60 billion rubles to 80 billion rubles a year, or as
much as 34 times the amount currently budgeted, they said.

Russia passed the budget law for the next three years and
isn’t yet planning to amend it, said Svetlana Nikitina, an aide
to the finance minister.

The 2014-206 plan includes 10.4 billion rubles to maintain
Sochi infrastructure, according to Finance Ministry data.

Swelling Deficit

Prime Minister Dmitry Medvedev’s spokeswoman, Natalya
Timakova, today declined to comment on further spending,
referring to his speech at a meeting in Sochi in December. At
the time, he said the resort should be comfortable, modern and
pleasing to both visitors and residents.

The government is still figuring out which buildings belong
to the state and which to businesses, Interfax reported Feb. 10.
Finance Minister Anton Siluanov said some will become
profitable, while others will remain dependent on the budget,
according to the news service.

Russia’s three-year budget puts spending at 14 trillion
rubles in 2014, including 2.3 billion rubles for Olympic
projects -- barely enough to cover the utility bills, according
to the Construction Ministry in Moscow. The deficit is forecast
to reach 390 billion rubles in 2014, or 0.5 percent of gross
domestic product, without including the new Olympic outlays that
are being debated.

Since Putin came to power in 2000, the government has run a
deficit three times -- during the global financial crisis in
2009 and in 2010, as well as last year, the busiest for Olympic
construction.

Luring Tourists

With the additional spending, the 2014 deficit will still
be less than 1 percent of GDP, according to a Bloomberg survey
of 21 economists, and remain the second-lowest ratio among Group
of Eight nations, after Germany.

Standard & Poor’s, Fitch Ratings and Moody’s Investors
Service have all said Russia’s Olympic spending is unlikely to
damage its sovereign credit rating. S&P’s ranks Russia at BBB,
its second-lowest investment grade, as does Fitch, while Moody’s
puts the country one level higher.

While Putin and other senior officials are betting the
investments by state and private companies in Sochi will lure
enough tourists to make the expense worth it, previous Olympics
show such goals are rarely met, according to S&P’s.

Over the past 50 or 60 years, only a few cities, including
Los Angeles in 1984 and Barcelona in 1992, have seen their
economies and finances improve as a result of hosting the
Olympics, Karen Vartapetov, associate director of S&P’s Moscow
office, said by e-mail yesterday.

Potanin’s Resort

“Payback of such events can be expected only over a very
long-term horizon,” Vartapetov said.

The Krasnodar region, which includes Sochi and helped fund
the Olympics, faces an additional struggle as the federal
government cuts its financial support to 20.9 billion rubles
this year, two-thirds of the annual 60 billion rubles it got
during the preparations, he said.

For billionaire Vladimir Potanin, who oversaw the
construction of the $2.5 billion Krasnaya Polyana ski complex,
creating Russia’s first world-class ski resort, which has 16
lifts and 77 kilometers (50 miles) of slopes, it’s worth waiting
years for a return on his investment.

“We took a piece of the Alps and brought it back to the
Caucasus,” Potanin, the chief executive officer and biggest
shareholder of OAO GMK Norilsk Nickel, Russia’s largest mining
company, said in an interview in Moscow in December.

‘Enormous Funds’

State development lender Vnesheconombank, or VEB, in
December extended the grace period for 241 billion rubles of
loans for 20 Olympic projects by two years, to the end of 2015.
The biggest credit, 73 billion rubles, went to Potanin’s
development company.

“Enormous funds were invested in the project, but in a
short time we built what other countries took dozens of years to
build,” VEB Chairman Vladimir Dmitriev said last month. “We’re
proud that the bank had a part in it.”

Since 2007, when Sochi was awarded the games, Russian
companies have built 14 sports venues, including the main
stadium, which can seat 40,000 people, and more than 19,000
hotel rooms, according to the Construction Ministry. Builders
laid 260 kilometers of roads and 200 kilometers of railroad and
constructed 54 bridges and 22 tunnels, while overhauling and
expanding the power grid, sewage system, port and airport.

“There’s a lot of separate work that needs to be done to
solve post-Olympic problems,”said Elena Anikina, a lead
negotiator with the International Olympic Committee during the
bidding process.

Sochi Transformed

Two hockey stadiums, for example, are scheduled to be
converted into sports centers for kids to train year-round and
the main media center, which covers an area seven times larger
than Moscow’s Red Square, is slated to become a shopping and
entertainment complex. How these revamps will be funded, though,
has yet to be determined.

For Putin, the transformation of Sochi, where he spends
much of the summer, isn’t just about the Olympics and showcasing
Russia’s achievements. It’s part of a wider push to boost the
economy of the whole North Caucasus region, one of the poorest
and most violent in Europe. To ensure a steady flow of tourist
revenue, he’s lined up events that will keep the sparkling new
Sochi in the spotlight.

Obama, F1

In June, Sochi will host this year’s G-8 summit, which U.S.
President Barack Obama and other world leaders are scheduled to
attend, followed four months later by the country’s first
Formula 1 Grand Prix in more than a century. Sochi is also one
of 11 Russian cities where soccer games will be played during
the 2018 World Cup.

Putin’s point man for the Sochi Games, Deputy Prime
Minister Dmitry Kozak, said he’s “absolutely” sure that
eventually the improved infrastructure in the region will foster
business development and boost budget revenue enough to cover
the maintenance costs of Olympic infrastructure.

“All the investments should pay off,” Kozak said in an
interview in Moscow in December.

In explaining his vision for Sochi, Putin said the city
should vie for tourists with Turkey, which received a record 4
million Russian visitors in 2013, as a year-round travel
destination. He said the sweat and money spent on the region’s
renewal should be enjoyed by ordinary Russians, as was the case
during the Soviet era, not just the elite.

For that reason, Putin said he rejected a proposal that
would have generated the most income in the shortest time --
legalized gambling. Putin outlawed casinos in all but four
special zones scattered across the country in 2006, as part of
an anti-vice campaign that included measures to curtail smoking
and underage drinking. Sochi, the president told its residents,
should remain a family resort.

“This is not for a small group of select citizens who can
spend hundreds of thousands of dollars in casinos,” Putin said.
“This is, frankly speaking, for the general public.”